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The Economist Gunvor

, 20 2009 . 08:13 +
The Economist Gunvor

Grease my palm
Nov 27th 2008

Bribery and corruption have become endemic

RUSSIA may not have democratic elections or the rule of law, but it does have one long-standing
institution that works: corruption. This has penetrated the political, economic, judicial and social systems
so thoroughly that is has ceased to be a deviation from the norm and become the norm itself. A
corruption index compiled by Transparency International gives Russia 2.1 points out of ten, its worst
performance for eight years and on a par with Kenya and Bangladesh. Ordinary Russians are well aware
of this, with three-quarters of them describing the level of corruption in their country as high
or very

The size of the corruption market is estimated to be close to $300 billion, equivalent to 20% of Russias
GDP. INDEM, a think-tank that monitors and analyses corruption, says 80% of all Russian businesses pay
bribes. In the past eight years the size of the average business bribe has gone up from $10,000 to
$130,000, which is enough to buy a small flat in Moscow.

A businessman who was stopped by the traffic police in Moscow recently was shown a piece of paper with
30,000 roubles
written on it. He refused to pay and asked the policeman why he was being asked so
much for a minor offence. The answer was that the policeman had bought a flat for his mother in
Bulgaria and he now needed money to do it up,
the businessmen said. Far from being a taboo subject,
corruption is discussed openly by politicians, people and even the mediabut it makes no difference.

Corruption has become so endemic that it is perceived as normal. Opinion polls show that the majority of
Russians, particularly the young, do not consider bribery a crime. The Russian language distinguishes
between offering a reward
to a bureaucrat for making life easier for you, and the brazen (and
sometimes violent) extraction of a bribe by a bureaucrat.

Small and medium-sized businesses suffer the most. Dmitry Golovin, who owns a tool-leasing company
in Yekaterinburg, explains: You go to the local administration to get permission for something and they
send you to a private firm that will sort out the paperwork for you, which happens to be owned by their

The reason for the persistent corruption is not that the Russian people Novosti
are genetically programmed to pay bribes, but that the state still sees
them as its vassals rather than its masters. The job of Russian law
enforcers is to protect the interests of the state, personified by their
particular boss, against the people. This psychology is particularly
developed among former (and not so former) KGB members who have
gained huge political and economic power in the country since Mr Putin
came to office. Indeed, the top ranks in the Federal Security Service
(FSB) describe themselves as the countrys new nobilitya class of
people personally loyal to the monarch and entitled to an estate with
people to serve them. As Russias former prosecutor-general, who is
now the Kremlins representative in the north Caucasus, said in front of
Mr Putin: We are the people of the sovereign.
Thus they do not see a
redistribution of property from private hands into their own as theft but
as their right.

The precedent was set by the destruction of the Yukos oil company in
2003-04. Mr Khodorkovsky, its then owner, was arrested at gunpoint
in Siberia and after a sham trial sent to jail where he has spent the
past five years. Yukos was broken into bits and, after an opaque
auction, passed to Rosneft, a state oil company chaired by Igor Sechin,
the ideologue of the siloviki.

What are we going to do about

Tricks of the trade

Mr Khodorkovsky was accused, among other things, of selling Yukoss oil through offshore trading
companies to minimise taxation. So now Rosneft sells the bulk of its oil through a Dutch-registered
trading firm, Gunvor, whose ownership structure looks like a Chinese puzzle. The rise in Gunvors
fortunes coincided with the fall of Yukos. A little-known company before 2003, Gunvor has grown into the
worlds third-largest oil trader, which ships a third of Russias seaborne oil exports and has estimated
revenues of $70 billion a year.

One of Gunvors founders is Gennady Timchenko, who sponsored a judo club of which Mr Putin was
honorary president and worked in an oil company that was given a large export quota as part of a
controversial oil-for-food scheme set up by Mr Putin during his time in St Petersburg. Mr Timchenko says
he was not involved in the deal and his success is not built on favours.

The Yukos case changed the logic of corruption. As INDEMs Mr Satarov explains, before 2003 officials
simply took a cut of businesses
profits. After Yukos they started to take the businesses themselves.
These days businessmen pay bribes as much to be left alone as to get something done. They call it a
bribe of survival.

This new form of corruption is changing the structure of the Russian economy. Yeltsin-era corruption
ended in a privatisation auction, even if it was a fake one. The new corruption ends in the nationalisation
of business,
says Yulia Latynina, a writer. Nationalisation is not quite the right word, however, because
sometimes state property is quietly transferred into private bank accounts. And even where a business is
formally controlled by the state, the profits or proceeds from share sales may never reach its coffers.

When Mr Medvedev was chairman of Gazprom, a state-controlled gas giant, one of his first jobs was to
oversee the return of assets which had been siphoned off under the previous management. But as Boris
Nemtsov and Vladimir Milov, two opposition politicians, explain in a recent book, Putin and Gazprom, in
the past few years Gazproms control over its multi-billion-dollar insurance company and part of its
pension funds has passed to a private bank called Rossiya, controlled by Yury Kovalchuk, who is thought
to be a friend of Mr Putins. The bank advertises itself as Rossiya: the country of opportunities.

A necessary evil?

Both Mr Medvedev and Mr Putin condemn corruption in public. In a recent speech Mr Putin grumbled:
Anywhere you go, you have to go with a bribe: fire inspection, ecologists, gynaecologistseverywhere.
What a horror!
Mr Medvedevs first presidential promise was to fight corruption for the Russian public,
and recently he thundered: We have to do something. Enough of waiting! Corruption has become a
systemic problem and we have to give it a systemic answer. Soon afterwards he appointed himself head
of a new anti-corruption committee.

Mr Satarov says this may be more than just populism. They feel that the system has become
unmanageable. They also need to protect and legalise the wealth they have accumulated in the previous
five yearshence all this talk about building a legal system.

As a former lawyer, Mr Medvedev has started with legislation. A
new draft law requires bureaucrats to declare their own and
their familys income and assets. But there are a couple of
loopholes. First, the information about their income is
confidential and available only to other bureaucrats. Second,
the family is defined as spouse and under-age childrenbut not
siblings, parents or grown-up children. It is as if the
government is telling everyone which accounts they should
transfer the money into,
says Elena Panfilova, head of
Transparency International Russia.

The trouble is that corruption in Russia has become a system of
management rather than an ailment that can be treated,
explains Ms Latynina. Central to this system is the notion of
kompromat, or compromising material. It is easier to control

someone if you have kompromat on them, so that is how a
boss often chooses his subordinates,
she says.

The only way to fight corruption, explains Ms Panfilova, is
through political competition, independent courts, free media
and a strong civil society. Those things may not get rid of it,
but at least they would establish uncorrupt norms. Yet fighting
corruption from within the Kremlin would require the skills of a
Baron Munchhausen, who famously escaped from a swamp by
pulling himself up by his own hair. As Mr Khodorkovsky said in
a recent interview: The fight against corruption is a fight for
The interview cost Mr Khodorkovsky 12 days in
solitary confinement. But the cost to Russia of allowing
corruption to flourish is a lot higher.

Copyright 2008 The Economist Newspaper and The Economist Group. All rights reserved.


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, 31 2009 . 18:54 +
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(David Satter) Darkness at Dawn: The Rise of the Russian Criminal State
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